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Securities Regulation and Corporate Governance > Posts > SEC Corp Fin Staff Releases New Compliance and Disclosure Interpretations on Proxy Rules and Schedules 14A/14C
SEC Corp Fin Staff Releases New Compliance and Disclosure Interpretations on Proxy Rules and Schedules 14A/14C

On May 11, the Division of Corporation Finance (the “Staff”) of the U.S. Securities and Exchange Commission (the “Commission”) released new Compliance and Disclosure Interpretations (“C&DIs”) regarding the proxy rules and Schedules 14A and 14C. These C&DIs replace the Staff’s previous interpretations published in the Proxy Rules and Schedule 14A Manual of Publicly Available Telephone Interpretations and the March 1999 Supplement to the Manual of Publicly Available Telephone Interpretations (collectively, the “Telephone Interpretations”).

Substantive Changes

As noted in the introductory language accompanying the guidance, C&DIs 124.01, 124.07, 126.02, 151.01, 161.03 and 163.01 reflect substantive changes to the Telephone Interpretations. These substantive changes are outlined below:

  • Discretionary Authority to Cumulate Votes 

C&DI 124.01 addresses the manner in which a proxy may confer discretionary authority to cumulate votes for director nominees. Under Rule 14a-4(b)(1), a proxy may confer discretionary authority for matters as to which a shareholder did not specify a choice if the form of proxy states how the proxy holder will vote where no choice is specified. The Telephone Interpretations stated that the authority of a proxy holder to exercise its discretion to cumulate votes among directors did not need to be printed on the proxy card pursuant to Rule 14a-4(b)(1) as long as there was appropriate cumulative voting disclosure in the proxy statement. C&DI 124.01 supersedes this interpretation, stating that a soliciting party can cumulate votes among director nominees only if it so indicates on the proxy card under Rule 14a-4(b)(1). In this C&DI, the Staff also reminds companies that any discretionary voting authority language on the proxy card should be printed in bold-faced type and that a proxy holder may only exercise its discretion to cumulate votes if applicable state law grants such authority and does not require separate shareholder approval of cumulative voting.

  • Preliminary Proxy Statement for Non-Rule 14a-8 Shareholder Proposals/Nominees 

C&DI 124.07 addresses when filing preliminary proxy materials is not required, despite receipt of adequate advance notification from a shareholder that intends to propose business from the floor of the meeting (a “non-Rule 14a-8 matter”). Section IV.D of Release No. 34-40018 (May 21, 1998) (the “1998 Release”) permits a company to avoid filing preliminary proxy materials despite adequate advance notification of a non-Rule 14a-8 matter as long as the company discloses in its proxy statement the nature of the non-Rule 14a-8 matter and how the company intends to exercise discretionary authority if the matter is actually represented for a vote at the meeting. The Telephone Interpretations stated that when the company does not have discretionary voting authority on the non-Rule 14a-8 matter because notice was timely and complete pursuant to Rule 14a-4(c)(2)(i), then the company cannot rely upon the discussion in the 1998 Release to avoid filing preliminary proxy materials. C&DI 124.07 clarifies the Staff’s interpretation by explicitly saying that companies cannot rely upon the 1998 Release where the registrant cannot properly exercise discretionary authority on the non-Rule 14a-8 matter under Rule 14a-4(c)(2).

  • No Preliminary Proxy Statement Needed Solely for Corporate Name Change 

C&DI 126.02 addresses whether a preliminary proxy statement is required when a proposed corporate name change will be submitted for shareholder approval at the annual meeting. In the Telephone Interpretations, the Staff took the position that where a proposed corporate name change is being submitted for shareholder approval at the annual meeting along with a shareholder proposal and the election of directors, then a preliminary proxy filing is not required. Both the shareholder proposal and the election of directors fall within one of the Rule 14a-6(a) exclusions from the preliminary proxy filing requirement, but the rule is silent on the corporate name change. In support of its position, the Staff noted that the underlying purpose of the exclusions from the preliminary proxy filing requirements outlined in Exchange Act Rel. No. 25217 (Dec. 21, 1987) is "to relieve registrants and the Commission of unnecessary administrative burdens and processing costs associated with the filing and the processing of proxy material that is currently subject to selective review in preliminary form." C&DI 126.02 reiterates the Staff’s previous position, but adds that “a change in the registrant’s name, by itself, does not require the filing of a preliminary proxy statement.” (emphasis added) In adding this clause, the Staff underscores that where a proposed corporate name change is submitted for shareholder approval at the annual meeting with other proposals that do not fall within the Rule 14a-6(a) exclusions, a preliminary proxy statement would still be required.

  • Applicability of Proxy Statement Instructions for Certain Issuances of Securities

C&DI 151.01 addresses whether Note A to Schedule 14A applies to shareholder approval of an offering of additional securities where the cash proceeds from the public offering may be used as consideration for an acquisition but alternative transaction financing is also available. Under Note A to Schedule 14A, the information specified by Items 11 (authorization or issuance of securities otherwise than for exchange), 13 (financial and other information) and 14 (mergers, consolidations, acquisitions and similar matters) of Schedule 14A must be provided when shareholders are asked to authorize the issuance of additional securities to be used to acquire another company and there will be no separate opportunity to vote on the acquisition. The Telephone Interpretations took the position that Note A applies even where the securities are sold in a public offering for cash to finance an acquisition. C&DI 151.01 takes the position that Note A would not apply where the cash proceeds from the public offering may be used as consideration for an acquisition, but the registrant has alternative means of funding the full amount of the acquisition. The Staff reasons that “[r]aising proceeds through a sale of common stock is not an integral part of the acquisition transaction because at the time the acquisition consideration is payable, the registrant has other means of fully financing the acquisition.” However, the Staff qualifies its position, adding that where the cash proceeds from the public offering are expected to be used to pay a material portion of the acquisition consideration, then Note A would still apply.

  • Can Omit Certain Individuals and Groups from the New Plan Benefits Table 

C&DI 161.03 supersedes the Staff’s previous guidance regarding the disclosure required in the New Plan Benefits Table under Item 10(a)(2) of Schedule 14A. Item 10(a)(2) requires tabular disclosure of the benefits or amounts that will be received by certain individuals and groups under the plan being acted upon. In the Telephone Interpretations, the Staff took the position that where the amount of benefits is “0” for an individual or group required to be included in the New Plan Benefits Table, the individual or group still had to be listed in the table with a “0” amount. C&DI 161.03 revises this interpretation and states that a company can either list the amount as “0” in the table, or omit the individual or group in question and explain this in the text accompanying the New Plan Benefits Table.

  • Impact of Elimination of Preemptive Rights From a Security

C&DI 163.01 revises the Staff’s position in the Telephone Interpretations regarding whether a proxy statement seeking shareholder approval for the elimination of preemptive rights from a security constitutes a modification of that security for the purposes of Item 12 of Schedule 14A. The Telephone Interpretations stated that the elimination of preemptive rights is a modification under Item 12 and thus, the financial and other information required by Item 13 must be included in the proxy statement. However, the Staff had added that eliminating preemptive rights “may be tantamount to creation of a new security, depending on the facts and circumstances, thereby raising an issue regarding Securities Act registration absent an exemption.” In C&DI 163.01, the Staff removes this additional clause and simply states that the elimination of preemptive rights from a security is a modification of that security under Item 12. Accordingly, the Staff implies that it no longer takes the position that the elimination of preemptive rights from a security could amount to the creation of a new security.


Non-Substantive/Technical Changes

The remaining new C&DIs reflect only technical or non-substantive changes to the Telephone Interpretations. Technical revisions to the Staff’s prior interpretations are contained in C&DIs 126.04, 126.05, 158.01 and 158.03. These technical provisions primarily supplement the guidance contained in the Telephone Interpretations with updated and revised references to applicable provisions and rules.  For example, C&DI 126.04 slightly revises the Staff’s prior guidance regarding whether a company that filed a Form S-4 can send proxy cards to its security holders upon the filing of a preliminary proxy statement or prospectus. The Telephone Interpretations stated that no proxy card can be sent until after the registration statement becomes effective and the final prospectus has been furnished to shareholders.  C&DI 126.04 supplements the Staff’s interpretation, referencing that Exchange Act Rule 14a-4(f) prohibits the delivery of proxy cards unless shareholders concurrently or previously received a definitive proxy statement filed with the Commission. In C&DI 126.05, the Staff reiterates its prior position that additional communications to shareholders relating to a transaction for which a registration statement on Form S-4 was filed and declared effective must be filed as other soliciting material pursuant to Rule 14a-6(b). The Staff adds to its position in the Telephone Interpretations to further clarify that. because the communication was sent after furnishing the definitive proxy statement, it should not be filed under Rule 14a-12.  C&DIs 158.01 and 158.03 contain similar technical clarifications. The remainder of the new C&DIs reissue the guidance contained in the Telephone Interpretations, making non-substantive revisions that adapt the Staff’s prior guidance to the C&DI format.

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